BlueScope is a global steel products manufacturer with operations predominantly in Australia, New Zealand, North America and the ASEAN region.
In early March, US president Donald Trump provided details on his long-anticipated plan to introduce a 25% tariff on steel imported into the US and a 10% tariff on aluminium imports.
The goal of the steel tariff is to boost US domestic steel capacity utilisation from about 74% to 80%. Based on a US government report, this corresponds to 6–8 million tonnes per annum of increased domestic production.
After the final proclamation was signed by the president, Australia was granted an exemption from the penalties, along with Mexico and Canada for an indefinite period as those countries continue talks on the North American Free Trade Agreement (NAFTA).
- Australia’s exemption follows months of intense lobbying by diplomats and senior politicians, and leverages long-standing trade and security relationships between the two countries.
- In fact, we note the imposition of tariffs could well benefit BlueScope's operations in the US. The company produces about 2 million tonnes per annum of hot rolled coil from its North Star facility in Ohio, and has significant leverage to higher US steel prices.
- In addition, the shielding of Australia – and therefore BlueScope – from the tariff also benefits the company’s US west-coast Steelscape business which makes finished products for the building industry. The Washington state-based Steelscape, which also has a plant in California, takes in about 200,000 tonnes of coil from Port Kembla, which is then transformed into a variety of coated and painted products. The exemption from the tariff gives Steelscape a cost advantage given its rivals on the west coast operate almost entirely on imported steel.
Over the past five years, BlueScope has undergone significant restructuring activities, including closing half of its manufacturing capacity in Australia. The company's first-half result for fiscal 2018 was very strong, leading us to raise our target price to $18.00 from $16.30. We maintain our Accumulate recommendation.